With the end of the tax year little more than five weeks away, investors mulling choices for their ISAs and SIPPs should certainly have investment companies on their radar as well as open-ended funds. They can have distinct advantages over their more popular OEIC and unit trust cousins but are too often ignored by execution-only platforms in their lists of rated investments.
The advantages investment companies have include independent Boards looking out for the interests of shareholders (and with the ultimate sanction of changing the fund management company), the ability to access illiquid asset classes such as property or private equity without having to hold large cash buffers, and the ability to borrow money – known as gearing – to make further investments. Trusts also come into their own during volatile markets, such as those we have seen so far in 2016, as the managers don’t have to battle with potential outflows of cash from investors while managing their portfolios.
With that in mind, here are some of our top investment company picks for the ISA season.
1. Scottish Mortgage Investment Trust – high convictions but low fees
If you are looking for a one-stop shop approach to invest in global stock markets, then the Scottish Mortgage Investment Trust has long been one of our favoured trusts. Managed by James Anderson, a veteran stock picker at Baillie Gifford, this may sound like a dull old investment trust but it actually takes a “guns blazing”, high-conviction approach to international investing focused on growth companies from across the globe. Around 47% of the portfolio is invested in US companies, 24.6% in Europe, 7.6% in the UK and 18.3% in Asia. There are 70 stocks in the portfolio, with large holdings including the likes of US firms Amazon and Facebook, Illumina (a leader in genomics), electric car firm Tesla Motors and Baidu, which is known as China’s “Google”. Unusually for an investment trust Scottish Mortgage Investment Trust usually trades at a small premium to net asset value and is currently trading at a 0.8% premium, but this is a small price to pay for those with a long-term horizon and investors can console themselves with the fact that the trust has very low annual costs, totalling 0.48%.
2. Henderson European Focus – Europe is our favoured developed market
Europe is our preferred developed market at the moment, as western Europe is a net importer of energy so is a beneficiary of low oil and gas prices. The European Central Bank is also providing vast amounts of liquidity that should support stock markets and may eventually ratchet up its Quantitative Easing stimulus programme. The Henderson European Focus trust, managed by Jon Bennett, is trading at a small -0.9% discount to net asset value. Bennett takes an unconstrained approach to investing, holding 54 shares in the portfolio. Healthcare continues to be a major theme, making up 20.6% of the portfolio, with top ten positions in Roche, Novartis, Bayer and Novo Nordisk.
3. Standard Life Equity Income – invests across the whole UK market
The Standard Life Equity Income trust is managed by rising star Thomas Moore with a similar approach to his UK Equity Income Unconstrained fund. This approach is a high conviction one, investing across the whole of the UK market and is not heavily biased to larger companies like most equity income funds. Indeed, currently the trust has just 34.8% invested in FSTE 100 companies, with 46.4% in mid-caps and the remainder in smaller company shares. With the outlook for dividends deteriorating, we think an approach that provides maximum flexibility makes sense. Examples of holdings include accountancy and payroll software firm Sage, data firm RELX and property website Rightmove. The shares can currently be purchased at 1.3% discount to net asset value.
4. F&C Commercial Property – diversify your sources of income
Having regularly traded at a big premium to net asset value, you can now snap up this high quality “bricks and mortar” trust at a 4.2% discount to net asset value. The trust holds a high quality portfolio of offices (37.9%), retail sites (26.8%), warehouses (17.6%) and industrial locations (15%), with a bias towards London and the South East. These include St. Christopher’s Place, a development of diverse shops and restaurants off Oxford Street, London and office block Cassini House in St. James’s Street, London. The average lease in the portfolio is seven years long and the portfolio is yielding 4.6%, with dividends paid monthly.
5. Personal Assets Trust – built for turbulent times
Cautious investors, unnerved by recent stock market volatility, might consider Personal Assets Trust, which is managed with an approach that places a high emphasis on capital preservation. The trust takes a multi-asset approach, investing in mostly US and UK shares (45.2%), index linked bonds (22.9%), gold bullion (10.3%) and cash and short-dated bonds (21.5%). This is not the type of investment to hold if you are super bullish on markets but in tough times, it will help protect capital and the managers have large amounts of cash at their disposal to move into shares if and when they believe it is attractive to do so. For now they remain cautious, citing the twin possibilities of Brexit and a possible President Trump as the potential source of more market jitters. Personal Assets Trust is trading at a 0.6% discount to net asset value.
6. Pacific Assets Trust – the “wild card”
Followers of our missives will be aware that we have been cautious about emerging markets for some time now, but the complete outbreak of bearishness fills us with a little more cheer that the risks and challenges facing these markets are now well reflected in share prices. These parts of the world have suffered much negative sentiment from the marked slowdown in China and also expectations of rising US interest rates pushing the dollar higher, making life painful for those countries and companies that have borrowed heavily in dollars. However, with the US economy now stalling, expectations of a “normal” cycle of US rate rises are evaporating and this has led to some recent weakening in the US dollar, providing some respite for Asia. Pacific Assets Trust is managed by David Gait at Stewart Investors, a leading manager of Asia equities. Like other Stewart Investors portfolios, it currently has a big overweight to India which represents 33.4% of the portfolio (compared to a 10% index weighting) and is very lightly exposed to China at 2.9% (versus a 28.4% index position).